FEDERAL STUDENT LOANS

There are four types of federal student loans available:

• Direct subsidized loans

• Direct unsubsidized loans

• Direct PLUS loans

• Direct consolidation loans

 

Direct Subsidized Loans

Direct subsidized loans are available to eligible to those undergraduate students who qualify. To qualify you have to demonstrated financial need. Your financial need is determined by your EFC. 

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If you qualify, this is the best loan for your student. While on most federal loans you can defer payments until 6 months after the student is no longer enrolled in school at least half time, this is the only federal loan that interest is not accruing. The federal government will cover the interest during deferment.

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A credit check is not required, but there are limits on the amount in subsidized and unsubsidized loans that you are eligible to receive each academic year and in total. The limits depend on your year in school and whether you are a dependent or independent student, which is based on information you supplied on the FAFSA.

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These loans are eligible for all the key benefits of the federal loan program that are designed to protect you as a borrower. You do not have to repay them while you are enrolled in school at least half time and during a six-month grace period after leaving school. Direct subsidized loans are eligible for several repayment plans that are designed to help you through periods of financial hardship, as well as loan forgiveness programs like Public Service Loan Forgiveness, or PSLF.

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Direct Unsubsidized Loans

 

Direct unsubsidized loans are very similar to subsidized loans with some differences. The major difference is that while you do not have to make payments while the student is at least a halftime student and a 6-month grace period, interest is accruing with the unsubsidized loan. The government is not picking up the tab. Another difference that graduate students are also eligible for unsubsidized loans whereas they are not eligible for subsidized loans. Also, unsubsidized loans eligibility is not based on financial need. All you need to do is apply, it does not matter what your income and assets are, you will receive an unsubsidized loan.

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The current interest rate on direct subsidized and unsubsidized loans is 4.99% for undergrads and 6.54% for graduate students. While the interest rate is fixed for the life of THIS loan, you do have apply and take out a loan every year in college (if needed) and those rates could fluctuate. There is an origination fee, which is 1.057%. These are the current rates for loans made after July. 1, 2022, and before July 1st, 2023.

 

The total maximum amount of direct subsidized and unsubsidized loans that undergraduate students can borrow is $31,000 for dependent students and $57,500 for independent students.  (see chart below for all federal student loan limits)​

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Direct PLUS Loans

 

Direct PLUS loans are made to either graduate or professional students, known as the Grad PLUS loan, or parents of dependent undergraduate students, known as the Parent PLUS loan. With a PLUS loan, you can borrow as much money as you need up to the cost of attendance – which is determined by your school – minus all other financial aid received.

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A credit check is required, but borrowers who have an adverse credit history may still be able to obtain a PLUS loan with a co-signer.

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The terms of these loans are not as good as the above loans, which is why you should look at direct unsubsidized and subsidized loans first. The current interest rate on PLUS loans is a fixed 7.54%. They also have an origination fee, which is 4.228% for loans made after July 1st, 2022, and before July 1st, 2023.

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There are some key differences between the Grad PLUS and Parent PLUS loans. Grad PLUS borrowers do not have to make payments on these loans while enrolled in school at least half time and during a six-month grace period after leaving school, but interest does accrue. Parent PLUS borrowers can apply for a deferment during these periods but are otherwise expected to begin making payments when the loan is disbursed.

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In addition, Grad PLUS borrowers can apply for income-driven repayment plans and are eligible for loan forgiveness programs like PSLF. Parent PLUS borrowers are not eligible for these options, although they may qualify for an extended repayment plan that allows lower payments over a longer period of time. They can consolidate the Parent PLUS loan into a federal direct consolidation loan and thus become eligible for income-contingent repayment plan. 

 

See the below chart (courtesy of studentaid.gov) that shows federal loan limits.

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Direct Consolidation Loans

 

Consolidation loans are a bit different than other types of federal loans. They allow borrowers to combine all eligible federal student loans into a single loan – which is usually done after leaving school – without an application fee.

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The interest rate on a new consolidation loan would be a weighted average of the current interest rates on the student loans that will be consolidated, rounded up to the nearest one-eighth of 1%. Consolidation loans are eligible for income-driven repayment plans and other options such as loan forgiveness programs.

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There are some benefits to loan consolidation, but you should think carefully about whether this is the right step for you. Consolidating can make repayment easier to manage by giving you a single and possibly lower monthly payment, and one student loan servicer. You can also get access to additional loan repayment plans and forgiveness programs, if you were not already eligible.

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Federal Student Loans Versus Private Student Loans

Federal student loans are made by the U.S. government. A federal loan, such as federal direct loan, will have a lower interest rate than a private loan. Federal loans also typically offer more favorable terms, flexible repayment plans and loan forgiveness options.

Here are some key differences between a federal student loan and a private student loan:

Interest rates

Congress sets the interest rates for federal student loans, which are typically lower than interest rates for private student loans. Private student loan interest rates are set by the lender, and are based on the borrower’s credit worthiness. These loans may have a variable interest rate or a fixed interest rate. Variable rates may start out lower, but they will fluctuate over time based on economic conditions.

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Eligibility

Just about anyone can get a federal direct student loan. The Department of Education requires a credit check for federal PLUS loans, but you may still be able to qualify even if you have an adverse credit history. Private student loans, on the other hand, always require a credit check and may also require a cosigner if you don’t have establish credit.

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Some federal loans, such as a direct subsidized loan, are based on financial need. Other federal student loans, such as a federal direct unsubsidized loan, are not based on financial need, but there are limits as to how much you can borrow. Private student loans are not based on financial need.

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Applying

The only way to get a federal student loan is to file the FAFSA and accept the loan on your financial aid award letter. Borrowers must submit the FAFSA by a certain deadline for each year that they need help paying for college. But, you can apply for a private student loan at any time throughout the year.

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Servicing

With a private loan, you are borrowing from a private lender. With a federal loan, you are borrowing money from the government. However, once the government disburses the funds they will assign the loan to a loan servicer to manage the account. The loan servicer is who you would contact if you wanted to change your repayment plan, apply for forbearance or deferment or update your contact information.

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Refinancing

You can refinance a private student loan to another private student loan with a lower interest rate or a better repayment term. You can not, however, refinance a federal student loan into another federal student loan, although you can refinance your federal student loan into a private one. That means once you refinance a federal student loan, you give up government protections like student loan forgiveness options. To keep your federal benefits, you might consider consolidating your loans into a direct consolidation loan.

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